Question

Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the following events are then most likely to occur?(i)New firms will enter the market.(ii)In the short run, price will rise; in the long run, price will rise further.(iii)In the long run, all firms will be producing at their efficient scale.

Answer 1

Answer:

I) New firms will enter the market, III)In the long run, all firms will be producing at their efficient scale.

Explanation:

In Microeconomics, this has already happened before. In most recent years, we have seen this For Flat Screen TVs and Smartphones. This is dynamic because the demand may or may not keep on increasing.

In addition to this, another important variable is the supply. The Cost curve is identical to both of them but this is also dynamical. But all of the firms will work harder and harder to lower the Cost curve, so they'll become more efficient.

Finally, in the long run the product retail price will inevitably fall.

Answer 2

Answer:

(i)New firms will enter the market.

(iii)In the long run, all firms will be producing at their efficient scale

Explanation:

A perfect competition is characterised by many buyers and sellers of homogenous goods and services. Market price is set by the forces of demand and supply.

If firms are earning positive profits, in the long run new firms would enter into the industry and this woold drive positive profits to zero. As a result , firms would be operating at the efficient scale.

I hope my answer helps you